Harnessing The Power Of The People Through "Value Of Solar"... And Beyond

Mike O’Boyle is the Power Sector Transformation Expert for Energy Innovation.

Fights over rooftop solar are cropping up around the country, with 47 states plus Washington D.C. considering action in 2016 to change solar policies. Net energy metering, a policy in 41 states under which energy generated by customers is credited against the cost of energy consumed from the grid, is the heart of most debates.

In absolute terms, homes, businesses, and factories with net metered solar are getting paid the retail rate for electricity; but many stakeholders question whether this adequately reflects the value of distributed solar.

Utilities often oppose net metering while customers are split, and these debates have boiled over into full-fledged fights in several states. In Arizona, for example, $6 million in dark money from utility and solar groups flowed to support and oppose candidates for the utility regulator.

Regulators in a handful of solar-leading states are examining a “value of solar” rate to resolve these net metering disputes. However, by valuing only solar, they are missing the opportunity to resolve future fights over valuing other growing distributed energy resources (DER) like energy efficiency, demand response or energy storage.

While seemingly straightforward, valuing solar is complex. Because electricity’s value varies widely with time, location and functionality, solar stakeholders can make viable arguments for reducing, increasing or maintaining compensation rates for distributed solar at the retail rate. An economic purist could factor in each of these particulars to ascribe a specific value to every last solar panel on the grid. In contrast, net metering provides no price signal for customers to install solar in more valuable locations, orient their panels in the most valuable direction (typically Westward), or maximize functionality and value with smart inverters or energy storage.

To provide electricity customers with the choices they want and incentivize them to add the most valuable DER, utilities must provide a value stream that matches the value DER provides the overall grid. This issue recently came to a head in Arizona, where in December 2016 the Arizona Corporation Commission decided to reduce customer solar generation compensation gradually over time based on the costs utilities avoid when buying customer-generated solar.

Though this paused an acrimonious fight over solar’s future in Arizona, it also exposed the flaws in rate design for driving investment in other distributed energy resources. Like solar, customer-owned DERs such as energy efficiency, demand response, battery storage and electric vehicle charging each reduce demand or shift generation in a way that provides value varying with time, location and functionality. But current compensation prices do not recognize these degrees of value with any precision.

Non-solar customers can provide all kinds of value to the grid if utilities get the price signals right. A piecemeal “value of X” approach fails to address how utilities must evolve to empower the diverse set of new clean energy technologies, including those from the customer side, to modernize the grid and lower electricity bills.

A key to developing the right price signals for electricity is through time-varying rates, where customers pay extra during peak times, but less during off-peak hours. For example, when customers do their laundry in off-peak hours or pre-cool their homes before peak afternoon temperatures, they save money and make the whole grid cheaper to maintain.

With automation technology, customers can evolve to even more precise time-varying rates like hourly real-time pricing. Over time, this financial incentive drives customer adoption of smart thermostats, smart appliances, EVs and energy storage to provide maximum value and choice.

A second key to properly valuing electricity is better planning to understand where DERs can avoid new infrastructure needs. Through this “distribution resource planning”, utilities and regulators can gain a clearer view of these resource benefits and where they can be deployed to save costs for everyone.

Without integrated planning, regulators in Arizona and other states wrestling with how to value energy will be unable to determine whether utilities are optimizing the system to take full advantage of customer behavior. So while value of solar seems holistic, it’s really just one piece of the puzzle.

California shows how other states can approach distribution resource planning. The state’s integrated distribution planning has already spawned utility innovation and is avoiding expensive grid upgrades. With the green light from regulators, Pacific Gas & Electric is partnering with companies like SolarCity to test if “smarter” solar arrays can reduce infrastructure investments needed to make the grid more reliable. Southern California Edison’s preferred resources pilot defines local grid needs and awards contracts to groups of customers, driving an energy storage boom, improving air quality and providing grid services at very low costs.

Instituting the right pricing signals to incent customer behavior will avoid the need for new multi-billion dollar power plants or transmission lines and prevent costly regulatory fights between utilities and their customers. Getting these price signals wrong, however, risks stifling innovation and customer choice while missing out on huge potential savings.

Instead of waiting for the next clean energy fight to boil up, states should consider looking beyond the value of individual technologies, and redesign power rates to take advantage of diverse customer resources and energy innovations. States that master this will become innovation hubs for advanced energy technologies, empower rather than restrict their utilities, and increase customer choices to maximize savings.